Impax is proud to be an early signatory of the statement of support for the recommendation of the Task Force on Climate-related Financial Disclosures TCFD. More than 360 investors with assets in excess of $19 trillion have written to the leaders of the G7 and G20 counties to support the Paris Climate Agreement, the clean energy future and the work of TCFD.
The rollout of the TCFD’s recommendations represents an important milestone in the international financial system’s internalisation of the emerging systemic risks of climate change. Set up in 2015, and co-chaired by Governor of the Bank of England Mark Carney, and investor/philanthropist Mike Bloomberg, the industry-led TCFD sought to “promote more informed investment, credit, and insurance underwriting decisions”. Its goal was to “enable stakeholders to understand better concentrations of carbon-related assets in the financial sector, and the financial system’s exposures to climate-related risks.”
The TCFD has developed four broad ranging recommendations, focusing on central themes of corporate organisation: i) governance, ii) strategy, iii) risk management, iv) metrics and targets. Each of the recommendations is supported by specific approaches that companies could employ to first assess and then provide information about climate-related risks. These recommendations are designed to offer companies and their investors a commercially actionable, voluntary framework to improve climate-related financial disclosures. In turn, reporting prepared in response to the recommendations should provide investors with a more complete understanding of the climate risks facing their individual holdings and across their portfolios, thereby encouraging better risk assessment in investment decision making.
For nearly 20 years, Impax has endeavoured to further investor understanding of both the direct physical impacts of climate change itself, and the associated regulatory risks resulting from financial exposure to companies with embedded carbon risk. We were one of the first investment managers to develop a method of measuring climate risk using a scenario approach to carbon pricing, an approach now recommended by the TCFD. We analyse the economic risk of major stocks in the MSCI World Energy Index, computing an expected valuation anomaly in those potentially affected. The expected valuation anomalies have informed the appropriate level of re-allocation of each stock in our “SmartCarbon™” models. We have also advocated that investors seek additional information from fossil fuel companies, and engage with regulators to mandate further information of the climate risks faced by companies.
We will encourage the companies in which we invest to adopt the TCFD guidelines to improve the quality of their corporate governance on climate risk issues, and augment corporate understanding and management of both climate risks and opportunities.
Climate risk is a defining corporate challenge of the 21st century. While not every company that takes affirmative steps to address climate risk will necessarily be a successful one, those that fail to do so will be putting their commercial future at increased risk.